Question
In: Economics
Let the utility function be given by u(x1, x2) = √x1 + x2. Let m be...
Let the utility function be given by
u(x1, x2) = √x1 + x2.
Let m be the income of the consumer, p1 and p2 the prices of good 1
and good 2, respectively.
To simplify, normalize the price of good 1, that is p1 = £1.
(a) Write down the budget constraint and illustrate the set of
feasible bundles using
a figure.
(b) Suppose that m = £100 and that p2 = £10. Find the optimal
bundle for the consumer. In other words, find the combination of x1
and x2 that maximizes the consumer’s utility when the prices are p2
= £10, p1 = £1 and her income is m = £100.
(c) Suppose still that m = £100 but now the price of good 2 has
increased to p2 = £30. Find the optimal bundle for the consumer. In
other words, find the combination of x1 and x2 that maximizes the
consumer’s utility when the prices are p2 = £30, p1 = £1 and her
income is m = £100.
(d) How can we explain the drastic change in demand for the goods
when the price of good 2 increased from £10 to £30?
Solutions
Expert Solution
d) also it is the nature of
the utility function or the preference that a drastic change in
price of good 2 makes the consumer shift to consume.img the
numeraire good only.
Rahul Sunny answered 1 hour agoRelated Solutions
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(a) Write down the budget constraint and illustrate the set of
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